The Dichotomy of Segregative and Integrative Institutions

and its Particular Importance for Sustainable Resource Use

and Rural Development

Konrad Hagedorn
Humboldt University Berlin
Chair of Resource Economics
Luisenstrasse 56, 10099 Berlin, Germany
Phone: + 49-30-2093 6305, Fax: +49-30-2093 6497
E-mail: k.hagedorn@agrar.hu-berlin.de
www.agrar.hu-berlin.de/wisola/fg/ress/

© 2005 Konrad Hagedorn

Paper to be presented at the

Workshop in Political Theory and Policy Analysis
Colloquium Mini Series,
Bloomington
October 20, 2005
(Second draft)

1 Introduction
During the last decade it has become more and more clear that achieving sustainability is
primarily a question of institutional change. At the same time, there is increasing evidence
that this process will lead to a higher degree of institutional diversity (Ostrom, 2005) and to
more complex governance structures (McGinnis, 2002). In line with these ideas, the there is
a growing awareness of the analytical limits of concepts which frame problems of coordina-
tion within a "market or state" dichotomy (Ostrom 1990). The author of this paper has elabo-
rated a framework for the Analysis of “Institutions of Sustainability” (IoS) that has been ap-
plied in several studies. The application has led to new insights as regards the particular fea-
tures of institutions supportive to sustainable development. In this way, it has raised the
question “What is special about those institutions which bring about sustainability?” Is there a
special class of institutions predominantly relevant for solving sustainability problems?
In the theory of institutions, many categories and definitions regarding institutions and gov-
ernance structures have been created. What classes and types of institutions are used in the
various institutional approaches often depends on the discipline of social sciences they origi-
nate from and the authors who have different notions of the institutional world and different
preferences regarding the suitability of terms. Most institutional scientists distinguish between
institutions as rules and governance structures as the organisational solutions for making
rules effective (e.g. Ostrom 1990, North 1990, Bromley 1992). In contrast, others maintain
that the term “institutions” covers both rules and organisations. For example, Williamson
(2000) has introduced the terms “institutional environment” and “institutional arrangements”,
the latter being more or less identical with “governance structures” and the first covering a
subset of rules that includes only the formal ones. In his “four levels of social analysis” he
attributes “informal institutions” to the level of “embeddedness” in social traditions and norms.
Homann goes beyond the notion of institutions as single rules and at the same time ex-
plains its difference to norms: “Institutions are distinguished from norms by the fact that
norms determine single actions, while institutions are understood as being systems of norms
or rules which give order to whole complexes of actions and interactions in a way that stabi-
lises expectations. This implies that single norms may change without the institution it be-
longs to, for example a market, also having to change. In this sense institutions are a meta-
arrangement to norms” Homann (1999: 52f.; translation from German by the author). Institu-
tions consist of abstract rules and not of individuals which are members of groups or com-
munities. A family can mean both a group and an institution, but in the latter case the per-
spective is different. This also applies to organisations like parties, bureaucracies and firms
which are formed by positions and have the role of collective actors in societies. “Institutions
seem to be closer to what the sociological systems theory conceives of social functions sys-
tems for which typically the economy, the legal system, science and politics are mentioned
as examples (Luhmann, 1984; 1997). However, appearances are deceiving. These subsys-
tems of society are indicated by its functions and by codes, programmes and eventually me-
dia. In contrast, institutions like private property and the family go across the borders of these
systems and are determined from a different perspective” (Homann, 1999: 52; translation
from German by the author). He also disagrees to defining institutions by their purpose or
function but prefers to understand an institution only as a being a “set of rules”.
Furthermore, distinguishing between formal and informal rules is certainly very popular, but
it is often not clear how to draw a line between them. Are formal institutions those which are
somewhere written, or should we prefer a more thoughtful definition that calls formal institu-
tions those which are explicit in the perception of the actors following these rules, and those
which are implicit, informal rules (see, Theory of Conventions; e.g., Morand and Barzmann,
2004)? Very plausible are differentiations of rules according to levels of decision making and
social interaction, as suggested by Ostrom, 1998; Kiser and Ostrom, 2000). They distinguish
between meta-constitutional, constitutional, collective choice and operational rules). In this
paper we will not draw a clean line between institutions, organization or governance struc-
tures. Rather we will treat them as elements of societies system of rules which affect different
levels of decision making. This is a very similar understanding of institutions as the one sug-
gested by Kiser and Ostrom (2000).
In this paper, a concept for the analysis of institutions that promote sustainability and a new
dichotomy along which we can distinguish sets of rules will be introduced. This is the dichot-
omy of Integrative and Segregative Institutions (ISI). In particular, it may be of interest for
economists who are used to arrange their guiding concepts in dichotomies that define op-
tions and alternatives of social organisation. In the past, such a dichotomy was “the market
and the state”. As the analytical capacity of this traditional dichotomy measured against pre-
sent requirements of institutional analysis is insufficient, the author of this paper suggests
replacing it by “integrative and segregative institutions”1.
This paper is organised as follows: First the basic ideas of both the analytical framework of
“Institutions of Sustainability” (IoS) and the dichotomy of Integrative and Segregative Institu-
tions (ISI) will be briefly outlined (Section 2). Then we will argue that the traditional market
and state dichotomy represents an inadequate concept and terminology for analysing institu-
tions of sustainability (Section 3). This requires a dichotomy shift towards integrative and
segregative institutions which is necessary if we take the idea of sustainability seriously (Sec-
tion 4). Finally, a proposal is made how to transform the regulative idea “sustainability” into a
meta-constitutional rule that influences institutional change.

1
Some authors use the terms integrating institutions for specific purposes for example for integrating environ-
mental policies into the policy making of the EU and its member states (Morand and Barzmann, 2004) or for the
analysis of corruption (Tonoyan, 2003). In this paper, “integrative and segregative institutions” are considered
as a more general concept for institutional analysis.

1
2 Institutions of Sustainability and Integrative versus Segregative Institu-
tions
The IoS together with the new dichotomy of integrative versus segregative institutions (ISI)
concepts build on the widely agreed convention that institutions are (sets of) rules of interac-
tions between individuals and groups and also between more aggregate actors such as na-
tions and societies. They shape the relationships between people and, provided that we “got
the institutions right”, they are embedding actors in such relationships to others that enable a
sustainable development. To be effective, they must be associated with adequate govern-
ance structures and be able to adjust to constantly changing technological and social condi-
tions. The established constraints restrict the behaviour of individuals vis-a-vis other indi-
viduals, but also provide them with opportunities in social action by defining their legitimate
scope of action (room of manoeuvre).

2.1 The Institutions of Sustainability Framework

The basic concept of “Institutions of Sustainability” was originally focussed on the question
of institutional change in the area of rural resource protection and agri-environmental co-
ordination (see Hagedorn et al., 2002). As can be seen from Figure 1, it takes into account
the main determinants, phenomena and outcomes of institutional change: transactions, insti-
tutions, actors, governance structures. These categories are linked as follows:
(1) Which institutional arrangements arise, depends on the features and implications of the
transactions related to nature and the ecosystem. This is mainly influenced by the physi-
cal properties and material transformations with which environmental goods and bads,
benefits and damages are associated. Technological innovation and structural change
lead to permanent changes of these properties and transformations.
(2) Simultaneously, institutional change depends on the characteristics and objectives of the
actors involved in those transactions. This is not only true for individual actors whose
values, interests and resources to exert influence (power) are very different, but also for
groups of individuals like communities using organisations and networks to shape institu-
tions according to their interest and to solve their conflicts.
(3) The changes in institutions, which result from the two main categories of driving forces
mentioned above, affect the design and allocation of rules at different levels and in par-
ticular property rights on ecosystem functions or more precisely, on those cost and
benefit streams which can be attributed to natural capital and ecosystem services. The
rules and rights can be defined for numerous ecological properties of a physical piece of
nature, each of them related to particular costs and benefits (and for each of these dif-
ferentiated rights components, the institutional design of the right or duty can differ).
(4) Necessarily, such changes in rules, particularly property rights on nature components,
are accompanied by corresponding changes in governance structures mainly for two
reasons: first, rules and rights (and duties) on nature components, must be supervised
and sanctioned to become effective instead of only being formal in nature; and secondly,
the actors can only make use of their rights and entitlements and will only fulfil their du-
ties and obligations, if transactions are organised and co-ordinated.
These processes of (intentional and non-intentional) institutional change take place in ac-
tion arenas which may differ by fields, scales and situations (see Figure 1). It is important to
note, that these attributes of the action arenas may widely differ. For example, the actors
may be rational planners or fallible learners. The fields of action can be differentiated accord-
ing to the physical subjects institutional decisions have to be made on, for example, soil pro-
tection or biodiversity conservation. Finally, the action arenas differ very much as regards
spatial and temporal scales.

2
 Figure 1: Analytical Framework for Institutions of Sustainability - IoS

Drivers of
Institutional Change

Transactions Action Arenas Institutions

with different properties, which differ by fields, as formal and informal
simple or complex, visible scales and situations rules, property rights
or hidden and duties

Properties of transactions Action situations Types of rules

• Excludability and rivalry • Actors constellations • Constitutional rules
• Assets specificity • Actors orientations • Collective-choice rules,
• Separability • Forms of interaction • Operational rules
• Frequency • Interests of actors • Categories of property
• Uncertainty • Knowledge of actors rights and duties
• Complexity • Mental models of actors
• Heterogeneity
• Identity of actors

Actors Subarenas Governance Structures

with different characteristics, organised according to different making the rules effective
trustworthy or opportunistic, Fields & Scales of Interaction
rational or emotional

Characteristics of actors Fields Scales Types of governance

• Values and beliefs • Land, soil • International Traditional concepts
• Reputation and trustworthi- • Water, flood (EU / World) • Market
ness • Air, climate • National • Hierarchies,
• Biodiversity • Regional • Hybrid forms
• Power resources
• GMO, etc. • Local, etc. Advanced concepts
• Information and knowledge
• Methods of action selection • Polycentricity
• Social environment and • Co-production
embeddedness • Multifunctionality
• Cooperation

Institutional and Political Environment

3
2.2 Processes and Effects of Transactions
In the concept developed in this paper, the terms “integrative” and “segregative” refer to
how the consequences of decisions made by an actor are dealt with under a set of rules.
Those consequences are, as will be explained in detail below, the process of transaction
itself, which provokes interdependence between actors, and the effects of transactions in-
cluding the distributional conflicts they may raise among them. “Integrative” and “segregative”
do not focus on the question whether or not actors can be included in or excluded from or-
ganisations like markets, bureaucracies and cooperatives. Accordingly, the term “integrative”
does not refer to the includability of an individual into collective action formed under coopera-
tive governance for the production of a common good, service or resource, and the term
“segregative” does not refer to the excludability of an individual from the use of a private
good, service or resource under market governance. This does mean not that such proc-
esses cannot originate from the impact of integrative or segregative institutions. For example,
if the effects of transactions are widespread they may affect many people, and this may imply
that integrative institutions for covering most of these effects also must include many people.
Nevertheless, the starting point is processes and effects of transactions.
We have not clarified the question up to now whether the integration or segregation always
happens directly by the institutions or by governance structures which make institutions ef-
fective. The same set of rules can often be put into practice by several types or combinations
of governance structures which may differ with regard to their integrative or segregative im-
pact of those decisions they are expected to govern. For example, the market position of
farmers can be protected by antitrust laws (a set of rules) but also by a system of coopera-
tives (a governance structure). In the latter case, property rights on the farmers’ assets re-
main rather segregative (e.g., private property rights in land), but a collective form of organi-
sation integrates a beneficial effect of farmers’ market transactions into their own domain –
market power. However, one could argue that establishing this governance structure may
leave those property rights untouched but requires a new set of rules that enable coopera-
tion. Thus, we can suppose that integration and segregation can be achieved with different
kinds of rules and at different levels of rule making. In this paper we will not explore this
question in more detail although this would certainly be relevant.
A framework for the analysis of institutional change which focuses on sets of rules and
governance structures for sustainability must emphasise the properties of transactions. This
makes it different from some institutional concepts in political science where the focus is on
the characteristics of actors and their relations (see, e.g., actors centred institutionalism;
Scharpf). The reason for this is that sustainability is closely related to the physical world.
Here the physical nature of transactions is relevant for institutional choice. However, when
developing a framework for analysing or even designing institutions of sustainability, we are
not equally interested in all kinds of (physical) transactions, but particularly in those which are
related to natural resources and ecological systems. This distinguishes the IoS framework
from conventional transaction cost economics (Williamson) which has been developed
against the background of transferring “commodities” (goods mostly produced by means of
engineered processes). In our case, “non-commodities” are at stake; that means goods, ser-
vices and resources which are received through those processes of self-organisation which
are typical for ecosystems and only to a limited extent influenced by humans.
If we accept that analysis of institutional change not always must pay equal attention to
both transactions and actors, we may consider concentrating on only one of these aspects:
1. For emphasising the relevance of transaction properties for institutional change, charac-
teristics of actors could be subjected to the ceteris paribus condition. In this case, the di-
versity of actors is blinded out; we assume that only “standard actors” are involved.
2. For emphasising the influence of actor characteristics on institutional change, properties
of transaction could be subjected to the ceteris paribus condition. In this case, the diver-
sity of actors is neglected; we assume that only “standard transactions” take place.

4
Although we clearly take the first view in this paper, we have to resist the temptation of actu-
ally setting the characteristics of actors ceteris paribus. This is because any concept of
transaction must sooner or later take into account transaction costs (and transaction bene-
fits). Transaction costs, for example costs of information or negotiation, clearly result from
intended, ongoing or past transactions which have affected different actors. In other words,
transactions reveal interdependence between actors. “Interdependence occurs when a
choice of one agent influences that one of another …. Interdependent agents cannot simul-
taneously realise their incompatible interests in scarce environmental resources and their
conflicts must be resolved by defining (or redefining) initial endowments” (Paavola and
Adger, 2005: 355). Strictly speaking, transaction costs do not result from the physical proce-
dure of transferring a unit of a good, service or resource from one point to another, but from
how the actors involved prepare for or respond to this physical change by communication.
Accordingly, transaction costs could also be called “interdependence costs” (though we will
continue to use the term transaction costs in this paper). Obviously, we deal with a phe-
nomenon in which the physical and the social dimensions are closely intertwined. “Interde-
pendence has two distinct sources: the attributes of the resource and the attributes of the
user” (Paavola and Adger, 2005: 356).
Let us take a closer look at the transactions. They represent the economic side (often being
related to physical and ecological objects) of the interactions regularised by institutions, par-
ticularly in those cases where interactions refer to scarce goods and services. When looking
at the main aspects associated with transactions we exclude the causalities why a certain
transaction takes place. These are enclosed in the production function which reflects factors
like factors supply, product demand, state of technology and knowledge available. When
looking at transactions in this way, three main phenomena seem to be relevant:
1. The properties of the good or the resource being transferred: These are not important per
se but only when it comes to a transaction of a unit of the good or resource. For example,
the toxic influence of nitrate in groundwater on babies only exists if somebody causes of
positive nitrogen balance, for example by excessive fertilising with nitrogen. Or physical
open access to common grassland only leads to degradation when pastoralists actually
use and overuse this land. However, transactions are usually not only influenced by the
particular good or resource in question, but also by other goods, resources and physical
circumstances. For example, nitrogen leaching depends much on the soil quality and
geological conditions. Whether overgrazing becomes a problem differs between years
because of changes in weather and climate.
2. The process of transaction by which the good or resource is transferred: In New Institu-
tional Economics, a transaction is defined by means of a technically separable interface
where one stage of activity terminates in a system of production and provision and an-
other one begins. A transaction may be simple, for example, if only one physical entity
that is homogenous and visible, has clear boundaries and is not connected with any non-
intended effects and implications is concerned (like selling bricks). But transactions may
also be complex, for example, non-visible, without clear boundaries, showing physical
heterogeneity, consisting of many sub-units and dimensions, involving numerous actors,
causing diverse and often hidden side effects and causing even impacts over a long time
that may be even affect future generations (for properties of transactions see also Sec-
tion 3.2). As transparency of such transactions would require much knowledge and in-
formation, they are usually connected with insecurity and risks for the actors involved.
This knowledge problem is more crucial for ecological systems than for production sys-
tems. Systems of production are “engineered“ systems that are modularibly comprehen-
sible, and only decomposable systems can be simple. Transactions related to natural
systems are complex, often not standardised, even unknown. Transaction impacts may
go unseen with hidden causalities. Accordingly, the physical properties of transactions
and the interdependence between actors caused by them may differ considerably. This
leads to very different conclusions regarding the question whether segregation works or
some or even much integration is required as shown in Table 1.

5
Table 1: Processes of Transactions and Interdependence: integration and segregation

Properties of transactions
Interdependence
caused by transactions Simple, engineered Complex, ecological

Harmony, sufficient Segregation works, Segregation creates problems,

social capital no integration required some integration required

Dissension, lacking Segregation creates problems, Segregation causes conflicts,

social capital some integration required much integration required

3. The effects of transaction on costs and benefits of actors: Similar to the process of trans-
action, also the effects of transaction are different. This applies to mainly two categories
of effects, first the burdens and benefits the interdependence between actors causes in
the process of the transaction, and secondly the final results of the transaction consisting
of beneficial and adverse effects. As indicated in Table 2, the outcomes in terms of the
adequacy of segregration and the necessity of integration are similar to those in Table 1.

Table 2: Effects of Transactions and Interdependence: integration and segregation

Results from transactions

Burdens or benefits
by interdependence Few, similar Numerous, divers

Easy, not costly, even Segregation works, Segregation works insufficiently,

creates extra benefits no integration required some integration required

Difficult, very costly, Segregation works insufficiently, Segregation leads to conflicts,

represents a burden some integration required much integration required

Many transactions which must be regularised by rules and governance structures have be-
come very complex, in particular, if they are related to engineered production and distribution
but to self-organising eco-systems. In such cases, the following two questions are relevant:
(1) What kind of impact of his or her activities is an actor expected to take into account?
This refers to both costs of interdependence in the process of transaction and final bene-
ficial and adverse effects: To what extent is internalisation of transaction cost compulsory
and how much externalisation of transaction cost is tolerated? Which process yielding
beneficial effects is an actor permitted to initiate and to appropriate the positive results,
and which adverse effects is an actor allowed to cause and to leave the negative out-
comes to others? As there is no full information and complete transparency on many ef-
fects which will materialise in the process of a transaction, for example during the produc-
tion and provision of a collective good, it is important at which stage of the process enti-
tlements to beneficial effects or liability for adverse effects becomes effective (see also
Section 4.1). In particular, when innovations which are associated with a high degree of
insecurity are implemented, this issue is relevant.
(2) What institutions (and governance structures) are able to select and attribute the transac-
tion costs, adverse and beneficial effects mentioned above to those eligible or responsi-
ble in a precise and reliable way? Not only single rules, but arrangements of different
rules and combinations of different types of governance may be necessary for this pur-
pose. Individuals may like to exploit benefits, avoid cost, and to reduce complexity. But

6
 the social choice situation is different and implies balancing cost and benefits for society.
This is what proper institutions are expected to achieve: balance cost and benefits, ac-
cord with norms, redistribute responsibility. At this point, also the concept of polycentricity
becomes relevant.

2.3 An Operational Definition of Integrative and Segregative Institutions

From these general notions we can now derive an operational definition of integrative and
segregative institutions. It seems plausible that this definition has to be derived from the im-
pacts these institutions produce for the actors involved (see Table 1). The frame of reference
we use for describing and ordering the impact of these institutions implies a normative de-
mand: Those who have caused costs should also bear these costs, and benefits should ac-
crue to those actors who have produced them. Although this is a very simple and widely ac-
cepted principle of fairness, it is far from being sufficient for evaluating the legitimacy of insti-
tutions. Doing this requires sophisticated theories such as the approach on the legitimisation
of institutions developed by Homann (1999). In this paper, we bypass this differentiated dis-
cussion on legitimisation concepts for institutions and continue clarifying the “integrative-
segregative perspective”.

Table 3: Consequences of Integrative and Segregative Institutions

Integrative institutions Segregative institutions

Processes of Transactions and Interdependence

Internalising transaction/ Obligation to internalise Incomplete obligation to internalise

interdependence costs

Externalising transaction/ No right to externalise Some rights to externalise

interdependence costs

Effects of Transactions and Interdependence

Beneficial effects Appropriate all benefits Focus activity, forego some bene-
fits, leave some to others

Adverse effects Accept all responsibility Deny complete responsibility,

shift part of it to others

(A) Integrative institutions allow actors, who make decisions on transactions, not only to profit
from beneficial effects, but they also hold them fully responsible for adverse effects. Simi-
larly, they not only force them to internalise the transaction costs they cause, but also
protect them against transaction cost resulting from the activities of other agents. Deci-
sion makers enjoy most of the benefits and bear most of the costs of their own decisions.
(B) Segregative institutions force actors who make decisions on transactions to focus and
refrain from receiving some beneficial effects, but also allow them to shift some of the
burdens resulting from adverse effects to other actors. They may externalise transaction
costs within limits, but can also not avoid bearing transaction cost which should rather be
attributed to other agent. To a certain extent, decision makers forego benefits and avoid
costs although they have caused them, and actors who have not participated in decision
making will have costs and enjoy benefits.

7
 In other words, integrative and segregative institutions establish different incentive struc-
tures which, over time, lead to different actor orientations and economic behaviour. Integra-
tive institutions require learning processes on how to organise "the whole”, while segregative
institutions induce learning processes including only a part of the bundle of effects of the
transactions concerned. The same applies to the perceptions and motivations actors de-
velop. In other words, integrative institutions co-ordinate decision making by means of a "sys-
tem approach" to learning and knowledge dissemination. Segregative institutions coordinate
decision making by means of a "part of the system-approach" to learning and knowledge
dissemination. This has consequences for the speed of change and the ways in which the
benefits of changes can be appropriated by single actors.
Since institutions are supposed to reduce complexity in social interaction, they are always
somehow integrative and segregative at the same time. On the one hand, they are integrat-
ing the interests of those who want to be protected against adverse effects into the decision
making of other actors by exposing these to corresponding constraints. On the other hand,
they secure a reasonable room of manoeuvre for a decision maker, even if this may require
that not all adverse effects he causes are kept away from other actors. Accordingly, we could
also speak of institutions which are more/less integrative and institutions which are more/less
segregative in nature. Strictly speaking, a frame of reference is necessary for making precise
statements on which institutions should be called integrative and which segregative. The
“Sustainable Area of Social Relationships” which will be defined in Section 4 could serve this
purpose.

3 The Market and State Dichotomy

In economics we are used to a dichotomy that sounds similar to the integrative versus seg-
regative institutions concept but is less universal and appropriate for present problems, be-
cause it does not refer to a result-oriented definition of classes of institutions but to two se-
lected and concrete types of governance: the market and the state. This is the first reason
why the concept is not neutral but biased. The second reason for this is that this concept
usually implies a particular hierarchy: The market as a superior institution is expected to or-
ganise all transactions, and only if it “fails”, the state as an inferior institution is supposed to
play a role.

3.1 Market Failure

This leads us to a few very important terms used in economics: “market failure” and “exter-
nalities”. The term “market failure” is used to suggest that, in principle, the “market” should be
able to cope with all tasks of coordination. However, this view is prone to failure from the
beginning. How could we expect that only one institution (and type of governance) could be
able to arrange all interactions and transactions properly, if we take into account the com-
plexity of social relations, modern technologies and economic transactions? Nevertheless,
the mode of operation and the institutional capacity of markets are measured against the
fictitious ideal of a co-ordination mechanism which is able to work perfectly and can be used
without any costs. Such an institution, provided that it could actually exist in the real world,
would be able to co-ordinate all processes of re-allocation associated with structural change
of agriculture without any transaction costs However, the diagnosis of failure or insufficien-
cies of markets and competition actually serves as a basis for legitimising political therapies,
in the most extreme case for justifying constitutional exemptions. De facto a choice between
alternative institutions takes place, which could only be substantiated by really comparing
these alternatives as regards their typical transaction costs and transaction benefits that are
related to their integrative capacities as shown in Figure 2.
Obviously, the view that markets are prone to failure is implicitly based on a comparison
with a perfect mode of operation of these institutions which hardly occurs in reality. Further-
more, it is implicitly assumed that they can actually be replaced by never failing political

8
processes and instruments. However, this notion of politics based on pure instrumental ra-
tionality has convincingly been criticised by public choice theorists who have stated that this
would imply a "benevolent dictator”. As a consequence, proponents of that view soon dis-
covered “policy failure”, what is more or less predetermined by the logic of the concept. The
discovery of policy failure has obviously motivated many liberal economists to resort to the
healing powers of the market again. The unrealistic notions of the co-ordination capacity of
these two institutions obviously lead to an oscillation between extremes and reasoning in
extremes, instead of starting with a realistic institutional analysis that recognises the diversity
of institutions and governance structures and not only argues in terms of “Market and State”.
As Eickhof (1984: 4ff.; 1986a: 468ff.; 1986b: 124ff.) has pointed out, the term “market fail-
ure” has insufficiently been defined, and its economic meaning is not clearly understood.
Accordingly, economists often talk about market failure although the market in a realistic view
is working properly. This is due to the fact that an idealised mode of operation is taken as a
frame of reference, and this implies that the actual performance of markets must more or
less differ from this idealised norm. Such a comparison, which Demsetz (1969: 1) has termed
the Nirvana Approach, in fact focuses on the difference between reality and a blissful final
state, but doesn’t say anything about reality and what can be achieved under realistic prem-
ises (Eickhof 1986a: 468f.). Although such a concept only enables unacceptable compari-
sons between notional ideal types and concrete real types of institutions, they are frequently
used to justify exemptions from the constitutional rules of competition, which automatically
leads to government regulation. Where the “invisible hand of competition” is said not to be
effective due to alleged insufficiencies, it must be replaced by the “visible hand of govern-
ment” (Eickhof 1983: 2; 1985: 64).
For these reasons, an adequate definition of market failure can only be based on actually
achievable and empirically observable modes of operation of markets and competition. This
criticism also maintained by Eickhof (1986a: 469; 1986b: 126) leads to two important conclu-
sions:
• As long as the diagnosis of market and competition failures is based on a frame of refer-
ence that pretends these institutions could function perfectly and co-ordinate all economic
transactions, we must inevitably arrive at an ubiquity of market failure. This is a cognitive
barrier to a reliable assessment of the coordination capacity of markets as compared to
other governance structures.
• The notion that the market, in case it fails, should (and can) be replaced by only one al-
ternative, the state, neglects the fact that the organisation of modern societies has be-
come much more complex and heterogeneous. In other words, it is a cognitive barrier to
recognising and searching for diverse institutions and governance structures that would
be better adjusted to the plurality of transaction and interaction, and to finding necessary
polycentric structures and relationships.

3.2 Externalities and Public Goods

The way the term “externality” or “externalities” is used in economics is closely related to
the notion of “market failure” outlined above. In fact, the question arises as to “external to
what” the phenomena called externalities are thought to be. That there are effects that are
actually external to the market cannot perceived of as a surprise, provided that we do not
assume that this type of governance structure should be able to solve all sorts of co-
ordination tasks. If they are assumed to be external to all existing institutions they can no
longer be interpreted as “market” externalities. In this case, institutional economists usually
use the term “open access”. Usually, discourses on “externalities” also reveal that most peo-
ple share the expectation that they “should” be “internalised”. Strictly speaking, shared ex-
pectations of this sort already represent rules, at least informal ones, although these rules
may still lack sufficient formalisation and implementation.

9
 The market and the state dichotomy has also shaped our perception of what private and
public goods are. In fact, there is no real definition of public goods in economics, but only one
of non-private goods. More precisely, we do not define private or public goods, but market
and non-market goods (the latter traditionally being assumed to be managed by the state). In
other words, the traditional definition is shaped by the dominance of one institution and gov-
ernance structure in our conceptual reasoning: those forming the market.
Strictly speaking, the properties of goods which are used to distinguish between so-called
private and non-private goods actually refer to the feasibility and circumstances related to the
transaction of the good. Which problems and particular requirements arise during the proc-
ess of transferring the good from the domain of one actor into the domain of the other? Of
course, for these features of transactions the properties of the good itself and of surrounding
goods and physical matter are also relevant. Whole physical structures and ecological sys-
tems and their dynamics and transformations are involved. Thus, transactions may have
many physical properties (including ecological ones) that are relevant for the choice of rules
and organisational tools which are adequate for governing them in satisfactory ways.
Having said this, it is surprising that only two properties of transactions (or goods) are men-
tioned in traditional economics for the distinction between private and public goods (i.e. non-
private goods): excludability and rivalry (or depletability). However, this can be explained by
the fact that these attributes have been identified against the background of one type of insti-
tution and governance structure dominating economic thought conceptually. The scientific
terms describing the relevant features of transactions are also not restricted to the character-
istics of a good or transaction; they also include a judgement on whether or not the transac-
tion can be effectively subjected to a certain rule and governance structure. In other words,
excludability and rivalry define main prerequisites for an institutional fit to markets. Extending
this way of reasoning to other governance structures is equally important. For example, in-
cludability clearly is a precondition for co-operation: a farmer living too far away from a pro-
ducer group cannot be integrated into the latter. Similarly, transactions which are supposed
to be regularised by a bureaucracy should have the property of “controllability“” or “suitability
for command and control“. In addition, many other features of transactions being relevant for
the workability of corresponding rules and organisational solutions exist, for example some
goods are not subtractable but grow with use, like biodiversity.
Besides the attributes of transactions emphasised by Williamson (2000) (uncertainty, fre-
quency and factor specificity), other features exist and can frequently be observed in the
area of public goods and particulary goods and services received from ecosystems: separa-
bility and jointness, e.g. multifunctionality, complexity, difficulties to standardise, stochastic
character, mobility, etc. As a consequence, the question arises whether institutional econom-
ics has made enough effort to identify the heterogeneity of transactions in the real world.
Discovery and description of properties of transactions and exploring what they mean for
sustainable institutions and governance structures is a relevant area of future research.
This approach to institutions is complementary to the analytical procedure suggested by
Ostrom (2005: 25) which starts with “understanding the working rules”, then discusses
“where they come from” and finally “rule following or conforming actions” of people. It may be
enlightening to start with the problem actors try to solve, that is ordering the relationships
which influence the conditions of transactions they want to optimise. Starting from this point,
we first have to look at the properties and implications of transactions and draw conclusion
regarding the impact of these properties on the emergence or design of adequate rules. As
already emphasised by introducing the concept of interdependence, this does not mean to
neglect the influence of actors and their forms of interaction - as well as actors constellations
and orientations - on the choice of rules. “Properties of transactions” and “characteristics of
actors” are both determining the process of how institutions arise, and they should not be
considered as isolated variables but as multiply interrelated (Hagedorn et al., 2002).

4 Dichotomy Shift Towards Integrative and Segregative Institutions

10
 At first glance, everybody might agree that institutions should be more integrative in nature
if they are supposed to be in line with the principle of sustainability. Inappropriate agricultural
practices that do not integrate concerns for nature conservation may endanger the resilience
of eco-systems. Excessive energy consumption is detrimental to the stability of the global
climate, because it does not internalise the greenhouse effects. Profit-oriented tourism may
destroy rural cultures if it does not take into account its impact on rural society. Many exam-
ples of this sort which call for integrative institutions could be collected. Daly’s (1990) plea for
recognising the complementary of man-made and natural capital is nothing else than a rec-
ommendation of an integrative strategy.

4.1 Balancing and Sequencing the Impact of Integrative and Segregative Institu-
tions
However, an analytical framework focussing on integrative and segregative institutions
must be able to produce a more balanced assessment. It can easily be understood, that a
too high demand for integration may cause considerable disadvantages. For example, an
entrepreneur who wants to apply a new technology faces the problem that it is more or less
unknown, how serious and costly the side effects of this new technology will be, and to whom
these side effects will accrue. If society holds him responsible for all possible side effects, he
will hesitate to make use of the innovation because his liability could ruin his firm in the fu-
ture. If many or all entrepreneurs respond in this way, neither they themselves nor society
and politicians will learn fast enough about the real progress and dangers associated with a
new technology. Simultaneously, society will forego potential gains in welfare from the inno-
vation process. Obviously, it can be reasonable to allow for some segregation in order to
maintain dynamic sufficiency regarding economic and social processes.
As already mentioned in Section 2.2, it is not negligible at what phase in processes of deci-
sion making on activities of planning, production, marketing, provision, etc. integrative and
segregative institutions become effective. In the centrally planned economies of the former
socialist countries, for example, rules for income distribution and social security were inte-
grated “too early” in the economic process, i.e. already in the production and provision activi-
ties. Due to the resulting distortion of economic incentives, losses of efficiency were caused.
In social market economies, rules for the same purpose are more segregated from the do-
main of production and provision, and its burdens become effective after income has been
generated. This example shows the importance of not only balancing but also sequencing
the impact of integration and segregation.
To put it another way, both integrative and segregative institutions usually cause both pri-
vate costs for the decision makers and social costs. These costs are, of course, not equal in
all cases, but depend on the properties of the particular transactions and the characteristics
of the actors involved, as explained in Section 3 (see also Hagedorn et al., 2002). Accord-
ingly, the costs of integration are a function of the various properties of the transactions and
characteristics of the actors:

(1) CI = f (PTi; CAj)

Similarly, the costs of segregation depend on these factors:

(2) CS = f (PTi; CAj)

11
 We will call the sum of costs of integration and costs of segregation the “costs of embed-
ding” of actors in social relationships:
(3) CE = CI + CS
CI = Cost of integration
CS = Cost of segregation
CE = Cost of embedding
PT = Properties (i = 1-n) of the Transaction(s)
CA = Characteristics (j = 1-m) of the Actor(s)
It should be noted at this point that both integration and segregation are associated with
two categories of costs:
(1) Transaction costs: These are the costs of information, co-ordination, negotiation, etc. as-
sociated with the processes of transactions and the interdependence between actors pro-
voked by the transactions. Both integrating and segregating the effects of a transaction
causes transaction costs. Integration causes transaction costs, for example when roundta-
bles are organised to solve conflicts between nature conservation and agriculture or for dis-
cussing agri-environmental programmes to be adjusted to the local specificities of the eco-
system and farm structures. Transaction costs of integration will increase the more integra-
tion is demanded by the existing institutions what requires efforts for implementation (see
Figure 2). Equally, transaction costs of segregation arise, for example when politicians have
to produce plausible justifications for laws allowing excessive energy consumption associ-
ated with high greenhouse gas emissions. Transaction costs of segregation will increase the
more segregation is admitted by the existing institutions because this burdens the agents
with unresolved conflicts (see Figure 2).
(2) Opportunity costs: These are the benefits of transactions from additional integration (and
less segregation) forgone if the rules and governance structures are segregative (rather than
integrative), and vice versa. As pointed out above, the degree of integration and segregation
affects the benefits of transactions which accrue to the actors. These potential benefits have
to be taken into account as opportunity costs. Benefits from integration which cannot be col-
lected due to (segregative) institutional constraints are opportunity costs of segregation, and
vice versa. Opportunity costs of integration will increase the more integration is the existing
institutions produce, and opportunity costs of segregation will also increase the more segre-
gation the existing institutions allow for (see Figure 2).
(3) Transaction and opportunity costs: As these two cost curves have a similar form, i.e. both
of them normally increase when the degree of integration or segregation grows, they can be
aggregated in a plausible way. This similarity of transaction costs and opportunity cost could
have been shown in separate graphs before aggregating them as done in Figure 2.
If we now start from the principle, that rules have to be agreed upon by the individuals par-
ticipating in decision making, we also have to assume that those individuals want to avoid
both the cost caused to them by integrative institutions and those resulting from segregative
institutions. (This assumption is in line with the approach of methodological individualism). As
shown in Figure 2, the costs of integrative institutions will increase, if more and more divers
effects of transactions are integrated in the decision making of the actor concerned, which at
the same time causes increasing transaction costs for implementation of the rules. Similarly,
the cost of segregative institutions will be the higher the more effects of transactions are seg-
regated and thus separated from the decision maker, which at the same time causes in-
creasing transaction costs for coping with unresolved conflicts. Figure 2 also shows that the
total cost including both components tend to increase, if the integrative and segregative as-
pects of institutions are in an imbalanced state. To what extent rules and governance struc-
tures should either expose an actor to or isolate him from the effects of transactions he or
others have caused represents a basic element of the construction of social relations. There-
fore, we call those costs the “costs of embedding in social relationships”.

12
Figure 2: Embedding Actors in Integrative and Segregative Social Relationships pti-
f
Costs
Costs

Unsustainable Sustainable Unsustainable

Costs of Embedding CE

( = Total Costs from Integration

Threshold and Segregation by Institutions)
of Sustain-
ability

Costs of Segregation CS
(transaction and opportunity costs)

Costs of Integration CI (transac-

tion and opportunity costs)

Costs of Segregation CS Costs of Integration CI

Sustainability Area of Institu-

tional Embedding

Institutional settings in which these cost of embedding in social relationships are too high
will not be sustainable. If there is a lack of integration (too much segregation), the social and
ecological systems will suffer from excessive burdens resulting from non-integrated adverse
effects and will lose their stability or even their capacity of resilience. If the existing rules and
governance structures demand a too high degree of integration (lack of segregation), society
and economy will lose its dynamic potential and will be unable to achieve the technological
and social adjustments necessary to avoid frictions and crises. This may not only result in a
decline of economic welfare but also lead to a loss of stability and coherence in society and
could finally negatively affect the process of civilisation. Similar consequences may arise if
the sequencing issue already pointed out above is not efficiently solved.
Of course, it has to be found out what “too high costs of embedding” actually means. This is
matter of knowledge generation, empirical research and social discourse in which politicians,
scientists, journalists, writers, administrators, NGOs and other public actors may play a
stimulating role. This may lead to a better understanding of the threshold of costs of embed-
ding beyond which sustainability becomes unlikely (see Figure 2). The “Sustainability Area of

13
Institutional Embedding” derived from that can be considered as a frame of reference for
determining when institutions can be called integrative, and when segregative2.

4.2 Plurality and Diversity of Families of Transactions and Families of Actors

Obviously, transactions between actors, due to the diverse and complex properties they
have, require different kinds and combinations of institutions and governance structures. In
this respect, some transactions may be more similar, others more different. From this point of
view, it appears instrumental to look for families of transactions, or perhaps more precisely,
families of properties of transactions, which fit to certain types of rules and organisation.
Such families of transactions may differ with regard to the need for integrative or segregative
institutions, i.e. may have different CI and CS curves in Figure 2. Equally, there certainly are
different families of actors, or families of characteristics of actors. Also for this case, the inte-
grative-segregative dimension may be reflected in different CI and CS curves. The CE curve
depends on the resulting aggregated effects and may have different forms which can be in-
terpreted in a way that resembles the interpretations used in the Economic Theory of Consti-
tutions (see, for example, Kirsch, 1997):
(1) In those cases where the CE curve in Figure 2 has the form of a “U”, the integrative-
segregative dimension may be relevant for the design of institutions and governance struc-
tures, because the actors are not indifferent as regards different degrees of integration and
segregation.
(2) Whether or not the integrative-segregative dimension is actually relevant, depends on the
sustainability threshold and on to what extent the “U”-shaped CE curve is located above or
below it, the latter section representing the Sustainability Area of Institutional Embedding.
(3) The more the actors consider the cost of segregation CS important, the more the “U”, the
Sustainability Area of Institutional Embedding and the minimum of the costs of embedding M
are located at the left side of Figure 2. Actors want to be well protected against the effects of
a high degree of segregation and accept relatively high levels of integration.
(4) The more the actors consider the cost of integration important, the more the “U”, the Sus-
tainability Area of Institutional Embedding, and the minimum of the costs of embedding M are
located at the right side of Figure 2. Actors want to be well protected against the effects of a
high level of integration and accept relatively high degrees of segregation.
(5) The steeper the slopes of the CI and CS curves are, and the higher the resulting CE
curve in Figure 2, the more costly is it to solve the problem of embedding actors adequately
in social relationships by choosing the right institutions and governance structures. In such
cases considerable efforts may be necessary to convince people that this is an important
task and that it will be rewarding to devote some of their resources to institution building3.
(6) The more narrow and skewed the CE curve in Figure 2 is, the more concerned the actors
involved will be by the issue of finding effective and efficient rules and organisational solu-
tions for sustainability. They consider this an urgent problem because the Sustainability Area
of Institutional Embedding where the costs of embedding are low and do not exceed the Sus-
tainability Threshold is rather small. The more the institutions and governance structures that
emerge unintentionally or have been intentionally designed fail to hit this small corridor, the
higher will be the cost of embedding which the actors have to cope with. In contrast, if the CE
curve is flat, actors are more or less indifferent as regards this question.

2
The solution derived in Figure 2 depends on the assumption that the curves CI, CS and CE are convex. If this
assumption does not apply, making the transaction in question may require extreme rules or even not be feasi-
ble.
3
The high input in terms of time and discussion required when establishing institutions by participatory processes
may be a good example for action situations of this sort.

14
 We have already pointed out in Section 4.1 that the integrative-segregative dichotomy of
institutions is of importance for the social organisation of sustainability which requires, in our
terminology, “Institutions of Sustainability”. The question arises as to how the logical link be-
tween ISI and IoS can be conceived of and how this connection can be consistently inte-
grated into an analytical framework. For this purpose, the following steps seem appropriate.
We first have to identify those properties of transactions for which the integrative-
segregative dimension is relevant. As it would often be too costly to establish rules and gov-
ernance structures especially adjusted to single transactions, families of similar (and possibly
coherent) transactions should be arranged, which match with corresponding types of rules
and organisation (as already mentioned in Section 4.2). As the same is true regarding the
characteristics of actors, the question of course arises whether analogously designed fami-
lies of actors would match with the designed families of transaction. Although it is neither
feasible nor reasonable to separate actors and the transactions they undertake, they may
belong to families which are not congruent in terms of their institutional fit. If both sorts of
families do not show the same institutional fit, they would - in an isolated view – call for dif-
ferent institutions and governance structures. As a consequence, incompatibilities may have
to be overcome by adequate compromises and combinations of - possibly complementary –
types and elements of institutions and governance structures, and of course also by invent-
ing new solutions. This calls for polycentricity and multifunctionality and represents a logical
consequence of the concept of integrative and segregative institutions. For the moment,
however, we may be allowed to neglect these rather complicated extensions and to proceed
to the next step.
Provided that sufficient information about the various bundles of beneficial and adverse ef-
fects of the transactions could be obtained, we may be able to identify costs of integration CI
and costs of segregation CS as pointed out in Figure 2. As this would deliver information on
the total costs of embedding CE, discourses and conclusions regarding the Sustainability
Area of Institutional Embedding would be facilitated. Based on the interpretations in Section
4.2 of how the relevance of the integrative-segregative dimension for different families of
transactions and different families of actors could be related to the curves reflecting the costs
of integration CI and costs of segregation CS and also the total costs of embedding CE,
theoretically, the process of institutional choice could be organised as follows (see Figure 3).
1. Select those families of transactions and families of actors where the integrative-
segregative dimension is likely to be relevant (see Section 4.2).
2. Identify and discuss the cost of integration CI and the cost of segregation CS and com-
pare the costs of embedding CE with the Sustainability Threshold (see Figure 2).
3. Chose from existing or craft new rules that manage to balance the cost and benefits of
integration and segregation in a way so that total costs comply with the sustainability
threshold.
This procedure pointed out here (in a rather simplified way) is outlined in Figure 3. It shows
the (further elaborated) IOS Framework already introduced in Section 2.1, Figure 1 (which is
compatible with the IAD Framework), and emphasises some additional aspects such as (a)
the importance of properties of transactions, (b) the necessity of forming families of transac-
tion and families of actors and (c) the need for a class of meta-constitutional rules for “Sus-
tainability” which (d) result from a process of transforming the insights gained through the ISI
concept into a basis for analysis and discourse which can make that regulative idea applica-
ble. This raises the question what is meant by this process of making a “regulative idea” a
part of the real world.

5 Sustainability as a Regulative Idea Transformed into a Meta-

constitutional Rule
Sustainability is often understood as a policy prescription according to a two stage logic:
First, normative premises, that means political objectives, have to be clarified in order to ob-
tain criteria for the design of political programmes: “Die Zweistufigkeit der gesamten Konzep-

15
tion dient letztlich dazu, vorab eine normativ – und meist extern – begründete Vorgabe zu
gewinnen, die eine plausible Handhabe bildet, die individuellen Interessen im Implemen-
tierungsprozess zu domestizieren und zu unterdrücken. Diese Strategie scheitert jedoch
nicht an der Realität, sondern auch theoretisch, und zwar letztlich an der – unzulässigen –
Übertragung des individuellen Handlungsmodells mit vorgegebenen Normen und gegebenen
Bedingungen auf Problemstrukturen, in denen Normen und entsprechende
Handlungsbedingungen erst noch gesucht und etabliert werden müssen, also auf
gesellschaftliche Entwicklungsprozesse“ (Homann, 1996: 37). Homann also maintains that
there never will be a satisfactory definition of sustainability. Already searching for such a
definition would be wrong. A reasonable understanding of sustainability can only be achieved
after a long process of searching, learning, and gaining experience, and even then we would
never definitely know what sustainability is. He recommends conceiving of sustainability as a
“regulative Idee bzw. als Heuristik” (Homann, 1996: 37) that induces and guides a change in
institutions. The normative content of that regulative idea is, by solving concrete problems,
transformed into incentive structures which provoke modified, i.e. sustainability-oriented be-
haviour.
What Homann calls a “regulative idea” clearly belongs to the “meta-constitutional rules”
which represents an important element in the IAD Framework developed by Ostrom (2005).
Such meta-constitutional rules influence the design or emergence of constitutional, collective
choice and operational rules, and the corresponding governance structures closely interre-
lated with institutions. Such an impact of sustainability as a regulative idea, however, can
hardly be expected as long as it stays an abstract term. To make it practical and applicable
to concrete problems, we can make use of the notion explained above that sustainability can
be interpreted as balancing and sequencing the integrative and segregative impacts of insti-
tutions and governance structures. By developing conceptions and knowledge about Sus-
tainability Thresholds of embedding costs, members of society will be enabled to communi-
cate about the Sustainability Area of Institutional Embedding hopefully supported by enlight-
ening contributions from scientists. In this way, the regulative Idea “sustainability” may more
and more become an applicable meta-constitutional rule.
At this point we have constructed the main instruments to interweave the ISI and the IoS
concept. As demonstrated in the left side of Figure 3, among those families having similar
properties of transaction and characteristics of actors there are at least some for which the
integrative-segregative dimension is relevant in terms of costs. This means that in case of an
imbalanced impact of integrative and segregative institutions these “families” may face prob-
lems of sustainability. This is reflected in those sections of the curve reflecting the costs of
embedding CE in Figure 2 located above the Sustainability Threshold, for example beyond
certain limits of stability or resilience. Accordingly, institutional change should be kept within
the Sustainability Area of Institutional Embedding indicated in Figure 2. As show in the centre
of Figure 3, this area can serve as operational tool for bridging the gap between the regula-
tive idea “sustainability” and social reality by making it an applicable meta-constitutional rule.
The left side of Figure 3 shows how this meta-constitutional rule can be put into practice, so
that it can be followed when designing lower-levels rules and governance structures.
Finally the question arises, of what specific nature the influence of the regulative idea “sus-
tainability” on rules and organisation will be. Although this question cannot be answered in
detail, the following considerations seem plausible: In reality those problems for which the
integrative-segregative dimension play a role, that means which may face non-sustainable
developments, often refer to transactions which are very complex, extremely heterogeneous
and difficult to standardise. The interactions related to these problems and transaction can
often only be governed by institutions and governance structures which are similarly compli-
cated, differentiated and adjusted to the specificity of the co-ordination tasks. This substanti-
ates the hypothesis that at the level of rules institutional diversity and connectivity, and at the
level of governance structures polycentricity and multifunctionality will play a predominant
role for institutions of sustainability.

16
 Figure 3: Advanced Framework for Institutions of Sustainability - IoS
Transactions
with different properties,
simple or complex, visi-
ble or hidden
Families of transactions
arranged according to similar-
ity of institutional fit of proper-
ties of transactions to types
rules and governance
1. Select those families of
transactions and actors
where the integrative-
segregative dimension
is likely to be relevant
Actors
with different characteristics,
trustworthy or opportunistic,
rational or emotional
Families of actors ar-
ranged according to similar-
ity of institutional fit of char-
acteristics to types of rules
and governance
Institutional and Political Environment
Drivers of
Institutional Change
Action Arenas
which differ by fields,
scales and situations
Action situations
• Actors constellations
• Actors orientations
• Forms of interaction
• Interests of actors
• Knowledge of actors
• Mental models of actors
• Identity of actors
2. Identify and discuss the
cost of integration and
segregation; compare
costs of embedding with
sustainability threshold
Subarenas
organised according to different
Fields & Scales of Interaction
Fields Scales
• Land, soil • International
• Water, flood (EU / World)
• Air, climate • National
• Biodiversity • Regional
• GMO, etc. • Local, etc.
Institutions
as formal and informal
rules, property rights
and duties
Types of rules
Meta-constitutional rules
• Constitutional rules
• Collective-choice rules,
• Operational rules
• Categories of property
rights and duties
3. Make compliance with
Sustainability Area of
Embedding Costs a
subset of meta-
constitutional rules
Governance Structures
making the rules effective
Types of governance
Traditional concepts
• Market
• Hierarchies,
• Hybrid forms
Advanced concepts
• Polycentricity
• Co-production
• Multifunctionality
• Cooperation
17
Conclusions
This paper has started with the question “What is special about those institutions which bring
about sustainability? In order contribute to an answer we have introduced into the Institutions
of Sustainability Framework which structures the analysis of sustainability according to four
main categories namely, transactions, actors, institutions and governance structures. From
there we proposed that the goal of achieving sustainability has to do with balancing two sorts
of costs and actor may face while being constrained by institutions. One is the costs from the
integrative effects of institutions on his individual decision making. The other is the costs from
the segregative effect of institutions. From there we proposed to classify rules according to
their integrative and segregative effects on individuals. We explain why we think that the
market or state dichotomy is inadequate for subordinating governance problems and types of
rules. As a contribution to theory we have then structured the problem with achieving sus-
tainability as a choice model in which we assumed a threshold of sustainability to exist. Sus-
tainability in this model is described as societies´ compromise between institutions which
integrate individual actors with their decisions in a wider system holding them fully responsi-
ble for their decision making and those institutions which partly free individual decision mak-
ers from parts of their responsibilities. It can be shown that different incentive structures for
actors result from segregative and integrative institutions, respectively. Based on this model,
we propose a theoretical method for the search for institutions which support sustainable
development. It becomes clear that changes in societies’ perception as to whether more seg-
regative or more integrative rules are appropriate have to do with the complexity of the gov-
ernance problem and the availability of knowledge. The more the governance problem is
characterized by "decomposability" (Simons 1971), the more accurate are segregative rules.
The more a particular governance problem is characterized by complexity (Kaufmann 1995),
the more accurate are integrative rules. Many of the sustainability problems of today take the
form of complex problems. Prominent contemporary scientific discourses like for example the
discussion about multifunctionality, multi-level governance in Europe, polycentricity, biodiver-
sity, or cross compliance refer to very complex governance problems characterised by the
felt lack of knowledge about cross level relationships and effects. In line with our arguments it
can easily be shown that increased knowledge about our environment has already induced a
shift towards more integrative rules for which sustainability serves as a "regulative idea".
The proposed dichotomy between segregative and integrative institutions is already at work.

References
Daly, H. E. (1990): Towards some Operational Principles of Sustainable Development. Eco-
logical Economics. Elsevier Science Publishers B.V.: Amsterdam: 97-102.
Demsetz, H. (1969): Information and Efficiency. Another Viewpoint. The Journal of Law and
Economics 12, No I: 1-22.
Eickhof, N. (1983): Wettbewerbspolitische Ausnahmebereiche und staatliche Regulierung.
Volkswirtschaftliche Diskussionsbeitrage der Universität Bamberg 24. Bamberg.
Eickhof, N. (1984): Wettbewerbliche Ausnahmeregelungen in der marktwirtschaftlichen Ord-
nung. Ansatzpunkte der normativen und positiven Theorie wettbewerbspolitischer
Ausnahmebereiche. Volkswirtschaftliche Diskussionsbeitrage der Universität Bamberg
27. Bamberg.
Eickhof, N. (1985): Wettbewerbspolitische Ausnahmebereiche und staatliche Regulierung.
Jahrbuch für Sozialwissenschaft 36: 63- 79.
Eickhof, N. (1986a): Staatliche Regulierung zwischen Marktversagen und Gruppeninteressen
- Ein Beitrag zur Weiterentwicklung der Regulierungstheorie. Jahrbuch für Neue
Politische Ökonomie 5: 122-139.
Eickhof, N. (1986b): Theorien des Markt- und Wettbewerbsversagens. Wirtschaftsdienst 66,
No. 9: 468-476.
Eickhof, N. (1987): Strukturpolitik und Branchenkrisen. WISU- Das Wirtschaftsstudium, 16,
No. 6: 324-329.

18
Hagedorn, K. (1996): Das Institutionenproblem in der agrarökonomischen Politikforschung,
Tübingen: J.C.B. Mohr (Paul Siebeck).
Hagedorn, K. (2005): Integrative and Segregative Institutions. Paper presented at the
TransCoop Workshop on “Problems of Polycentric Governance in the Growing EU”, Ber-
lin, June 16-17, 2005.
Hagedorn, K., Arzt, K., and U. Peters (2002): Institutional Arrangements for Environmental
Co-operatives: a Conceptual Framework. In: K. Hagedorn (ed.): Environmental Co-
operation and Institutional Change: Theories and Policies for European Agriculture. New
Horizons in Environmental Economics. Cheltenham, UK, and Northampton, MA, USA:
Edward Elgar: 3-25.
Homann, K. (1996): Sustainability: Politikvorgabe oder regulative Idee? Sustainability:
Politikvorgabe oder regulative Idee?. In: Lüder Gerken (ed.): Ordnungspolitische
Grundfragen einer Politik der Nachhaltigkeit. Baden- Baden: Nomos: 33-47.
Homann, K. (1999): Die Legitimation von Institutionen, in: Wilhelm Korff et al. (eds.): Hand-
buch der Wirtschaftsethik, 4 Volumes. Gütersloh 1999, Vol. 2: 50-95.
Hooghe, L. and G. Marks (2003): Unravelling the Central State, but How? Types of Multi-
level Governance. American Political Science Review 97(2): 233-243.
Kirsch, G. (1997): Neue Politische Ökonomie. Düsseldorf: Werner.
Kiser, L. L. and E. Ostrom (2000): The Three Worlds of Action: a Metatheoretical Synthesis
of Institutional Approaches. In McGinnis, M. D. (ed:), Polycentric Games and Institutions.
Readings from the Workshop in Political Theory and Policy Analysis. Ann Arbor: Univer-
sity of Michigan Press: 56-88.
Luhmann, Niklas (1984) Soziale Systeme. Grundriß einer allgemeinen Theorie. Frankfurt am
Main: Suhrkamp.
Luhmann, Niklas (1997): Die Gesellschaft der Gesellschaft. Frankfurt am Main: Suhrkamp.
Mantzavinos, Chrysostomos, Douglas C. North and Syed Shariq (2003): Learning, Institu-
tions, and Economic Performance. Perspectives on Politics; Working Paper Series of the
Max Planck Institute for Research on Collective Goods 13. Bonn, Germany.
McGinnis, M. (ed.) (2000): Polycentric Games and Institutions. Readings from the Workshop
in Political Theory and Policy Analysis. Ann Arbor: University of Michigan Press
McGinnis, M. (2002): Polycentricity and the Core of Governance. Preliminary draft prepared
for the discussion in Political Science Y673 seminar. March 20, 2002.
Morand, F., and M. Barzmann (2005): Integrating Institutions for Sustainable Development:
‘green speak’ and beyond. IDARI Working Paper. Berlin: Humboldt University.
North, D. C. (1990): Institutions, Institutional Change and Economic Performance. Cam-
bridge.
Ostrom, E. (1998): The Institutional Analysis and Development Approach. In: E. Tusak-
Loehman and D. M. Kilgour (eds.): Designing Institutions for Environmental and Re-
source Management. Cheltenham UK and Northampton ME, USA: Edward Elgar: 68-90.
Ostrom, E. (2005): Understanding Institutional Diversity. Princeton: NJ: Princeton University
Press.
Ostrom, E. (1990) Governing the Commons. The Evolution of Institutions for Collective Ac-
tion. New York: Cambridge University Press.
Paavola, Juoni, and W. Neil Adger (2005): Institutional Ecological Economics. Ecological
Economics 53: 353-368.
Tonoyan, Vartuhi (2003): Entrepreneurship and Corruption: Integrating Institutions, Rational-
ity and Social Norms. Veröffentlichungen des Instituts für Mittelstandsforschung, Grüne
Reihe 54. Universität Mannheim: ifm.
Williamson, O. (2000): The New Institutional Economics: Taking Stock, Looking Ahead.
Journal of Economic Literature 38 (September): 595-613.

19